It sounds like I'm going to be $5.80 wealthier because of the cash dividend and the bond funds increase in value. Does it hold true for an ETF where 100% the interest is reinvested back into the bond fund? Am I still $5.80 ahead in my IRA account?

(and this is from a guy who has been investing for at least 20+ years).

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I believe that the IRS treats these bonds just like zero coupon bonds so taxes are due on the phantom interest. You have to pay taxes on money before you see it so I think they are better candidates for tax deferred accounts.

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I believe that the IRS treats these bonds just like zero coupon bonds so taxes are due on the phantom interest. You have to pay taxes on money before you see it so I think they are better candidates for tax deferred accounts.

The two TIPS funds I know of (TIP and VIPSX), both pay out the inflation adjustment as well as the real interest. TIP pays monthly. Vanguard pays quarterly. Since TIPS (and other treasuries) are state-tax free, it may be advantageous to hold these funds in your taxable account, depending on your tax situation, of couse.

The two TIPS funds I know of (TIP and VIPSX), both pay out the inflation adjustment as well as the real interest.

Could you please clarify this? Do you mean pay out (as in a cash payout) or "pay out" (as in they report the phantom interest along with the real interest payout so the investor has to pay tax on both)?

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Could you please clarify this? Do you mean pay out (as in a cash payout) or "pay out" (as in they report the phantom interest along with the real interest payout so the investor has to pay tax on both)?

Pay out, as in distribute the inflation adjustment as part of the dividend. So, when you hold TIPS via such a fund, they are no different than any other treasury bond fund -- you pay taxes on what you receive as dividends.

I haven't been able to figure out exactly how they do this (well, I haven't actually asked them either). Obviously, they receive the inflation adjustment whenever they sell a bond or one matures, so it makes sense that they pay that out as part of the dividend. But I don't know if they try to "manage" their dividends. It looks like the TIP ETF might, since they report part of the distribution as return of capital.

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